Utica Shale oil outlook fades, gas still prospective: analysts

Houston (Platts)--19Apr2013/440 pm EDT/2040 GMT

While acreage sales in Ohio's Utica Shale seem to indicate a less optimistic outlook for oil production in the region, the play still has plenty of natural gas and liquids to offer, analysts said.

Chesapeake Energy, the largest producer in the play, recently announced an increased natural gas net production target for the end of this year at 330,000 Mcf equivalent/d, a 340% increase from current levels.

But the company is also selling about 94,205 acres in the play, according to Meagher Advisors, an acquisition and divestitures firm involved in the potential transaction. The acreage is in Portage and Stark counties, which is part of the oily window, according to Meagher's website.

Chesapeake Energy spokesman Jim Gipson declined to comment. A handful of other companies, such as Devon Energy, have also recently put Utica acreage up for sale, providing a mixed message of how fruitful production has been.

"We are seeing the same thing we saw in Eagle Ford; there are areas where lots of oil is in place but there is not enough reservoir energy to produce high rates that bring oil to the surface," a regional analyst said. "The wet gas window is what is working, there is plenty of condensate being produced but we are not seeing wells that are 75% oil."

The Utica could turn out to be more of a gassy play with natural gas liquids rather than the oily play that Chesapeake might have billed it as a couple years ago, the analyst said.

"But I have a little bit of hesitation; I do not think it is entirely written off [for oil]," the analyst said.

Another analyst said most of the acreage being sold is in the western portion of the play, which has proved to be less productive than the east. However, there has not exactly been a mass exodus to get out of the play, the analyst added.

Much like every other unconventional play, there is a core and a non-core, and if a company has assets in the non-core, it is not going to have the wherewithal to remain there, the second analyst said.

Some of the deeper oil production has not worked out as expected, and some of the western acreage has not been very productive, but that does not condemn the entire play, he said. The eastern side of the play, where it is gassier, still has high rates of return because it does have condensate, natural gas liquids and a prolific amount of gas, the second analyst said.

As companies scale back their oil production expectations in the play, the focus may shift to natural gas and liquids. But experts agree the wild card is infrastructure -- processing facilities and pipelines to ship it out of the region to more liquid markets.

"Supposedly Chesapeake has only connected 25% of its wells in Utica and they have been constrained largely because of infrastructure issues," said Teri Viswanath, analyst with BNP Paribas. "But there seemingly could be good flow into the market produced from wells connected over the course of the next year."

Chesapeake is waiting on a few facilities that they are involved in: a processing facility M3 Midstream is building in Kensington, Ohio, and a NiSource processing facility in Harrison County, Ohio, both of which are expected to come online mid-year, the first analyst said.

As companies continue to develop the region, there is a sense of "hurry up and wait" as production continues only to have to wait for infrastructure both for the processing and takeaway of liquids and natural gas, "both of which are limiting the ability to monetize on investments," Viswanath said.

There are wells online to sales but it is "severely constrained," the analyst said. "The market is in wait-and-see mode."

--T.L. Hamilton, tiffany_hamilton@platts.com --Edited by Jason Lindquist, jason_lindquist@platts.com

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